Countries operating in a market based economy regulate their financial sector on the basis of a regulatory framework for financial institutions which includes legal rules and a system of agreed prudential standards. Furthermore, the banking supervisory authorities of such countries expect the financial institutions to self-regulate themselves to a large extent. A key role of banking supervision is to monitor the application of the agreed prudential standards to limit risk. These standards should be reviewed periodically to allow for changing circumstances.

Although a great number of countries have adopted such a framework, to be effective, the framework must reflect the legal, commercial and cultural traditions of the nation – there is no one “best practice” supervisory framework that can be applied to all countries.

A supervisory and examination system is a key component of a financial institution regulatory framework. It ensures that financial institutions comply with the regulatory framework. It assesses whether financial institutions are able to meet their obligations as they fall due. It also gathers information to assist CBSI in further developing and improving its regulatory framework.

The Regulatory Framework in the Solomon Islands

The framework for regulating the financial sector in Solomon Islands consists of legislation (largely the CBSI Act and FIA) and the facility under FIA for a system of agreed prudential standards.

Whilst CBSI expects the licensed financial institutions to self-regulate themselves to a large extent, a key role of banking supervision is to monitor the application of the agreed prudential standards to limit risk. These standards should be reviewed periodically by CBSI to allow for changing circumstances.

The “rules and regulations” for the financial sector in SI are found in the Financial Institutions Act 1998 (as amended) which provides a supervisory umbrella and addresses issues such as:

• defining financial institutions and banking business;
• rules regarding ownership;
• licensing requirements;
• minimum capital requirements;
• restrictions of business activities;
• definition of the roles and duties of external auditors;
• measures to protect the interest of depositors;
• a supervisory and examination system; 
• situations where CBSI may intervene in the operations of a financial institution;
• transfer of ownership or control of a financial institution; and
• sanctions for non-compliance by financial institutions or their officers.

Financial Institution Regulatory Framework

A supervisory and examination system is a constant continuous and perpetual cycle that has four components:

• CBSI’s goals and objectives,
• monitoring and the examination planning phase,
• on-site examination phase, and
• reporting and corrective actions phase.